297 F.

2d 130

UNITED STATES of America, Plaintiff-Appellee,

v.
HAMDEN CO-OPERATIVE CREAMERY COMPANY, Inc.,
Defendant-Appellant.
No. 357.
Docket 26747.

United States Court of Appeals Second Circuit.

Argued May 26, 1961.
Decided December 14, 1961.

William H. Orrick, Jr., Asst. Atty. Gen.; Elliot Kahaner, U. S. Atty.,

Brooklyn, N. Y., John G. Laughlin, Attorney, Department of Justice,
Washington, D. C., for plaintiff-appellee.
O'Brien & Kelly, Brooklyn, N. Y. (Joseph F. O'Brien, John D. Kelly,
Brooklyn, N. Y., of counsel), for defendant-appellant.
Before CLARK and WATERMAN, Circuit Judges, and ANDERSON,
District Judge.
WATERMAN, Circuit Judge.

The defendant-appellant, Hamden Co-operative Creamery Co., appeals from an

order of the United States District Court for the Eastern District of New York
granting a motion for summary judgment in favor of the plaintiff-appellee
United States, sole stockholder of Commodity Credit Corporation.

In April, May, and June 1950, Hamden entered into six contracts with the
Commodity Credit Corporation (CCC) for the sale of 3,460 drums (671,664
pounds) of "Extra Grade" powdered milk, a quality fit for human consumption.
Pursuant to Announcement DA-65 of the United States Department of
Agriculture, under which the contracts were made, experts chosen by CCC
inspected, graded, and weighed the powder; and, as a result, the Department of
Agriculture issued Grading Certificates indicating that the defendant's milk

powder met the requirements of "Extra Grade." The inspection consisted of a

visual examination and a one pound sampling of approximately one drum (200
pounds) in every twenty drums (4,000 pounds). The samples were sent to a
government laboratory for analysis. After the Government had inspected and
accepted the powder, f. o. b. Hamden's plant, the powder was delivered
between May 20, 1950, and June 12, 1950, to two government warehouses, one
in Staten Island, New York, the other in Waverly, New York.
3

On July 14, 1950, an inspector of the New York State Bureau of Markets
discovered maggots in Hamden's plant. On July 25, 1950, the Regional
Supervisor of the Dairy and Poultry Inspection and Grading Division of the U.
S. Department of Agriculture also inspected the plant and found infestation by
larvae classified as maggots, meal worms, and carpet beetles, the latter two in
the pupal stage as well as the larval stage. He suggested that Hamden install a
new sanitary packing operation in place of the conveyor metal chute then being
used, which, he stated, was almost impossible to keep clean. Hamden
immediately made this change and then its plant was reinspected and approved.

Just prior to the July 14 inspection Hamden had shipped four cars (780 drums)
of milk powder to CCC (not the powder involved in the present litigation).
Although these drums also had originally passed government inspection, a
reinspection subsequent to the discovery of infestation in Hamden's plant
disclosed that this milk powder was infested. Upon the request of the
government contracting officer, Hamden agreed to accept the return of this
shipment.

In September 1950 the Government reinspected the May and June shipments of
milk powder and found larvae present. Consequently, on October 17, 1950,
CCC demanded that Hamden accept the return of this powder. Hamden refused,
and stated as one ground for its refusal that the rejection was too long delayed.
Thereupon, CCC sold the infested powder as animal feed at a loss to the United
States of $12,386.60. Acting pursuant to the standard disputes clause of the
contracts, the contracting officer, on January 23, 1952, notified Hamden that he
found the powder to be infested at the time of delivery to CCC and demanded
payment for the damages sustained by the United States in the amount of
$12,386.60.

Within thirty days Hamden, as its contract permitted it to do, appealed to the
Contract Disputes Board. In making its findings, the Disputes Board considered
the oral testimony of the appellant's attorney, who was personally acquainted
with the facts; the oral testimony of two officers of the Department, who did
not have such knowledge; the contracting officer's written statement of his

findings; and opinion letters concerning the presence and discoverability of

infestation from a government expert entomologist and from an expert for the
appellant. From this material the Board found that the government warehouses
where Hamden's powder was stored were free from infestation; that powder
received from other manufacturers stored in those warehouses was similarly
free from infestation; that Hamden's milk powder was infested at the time of
delivery; that the infestation at that time was a latent defect which did not
preclude CCC from subsequent rejection of the commodity; and that, therefore,
Hamden was indebted to CCC in the amount of $12,386.60, being the
difference between the cost of replacement of Extra Grade milk powder, fit for
human consumption, and the price obtained from the sale of the infested
powder for animal feed.
7

Hamden refused to pay the amount the Contract Disputes Board assessed, and
the Government instituted this action to recover that sum. Answers to
interrogatories posed to the Government's witnesses in 1956 for trial use
disclosed that in 1950, as the Contract Disputes Board had found, the
warehouse in Waverly and the powder of other manufacturers stored there were
free from infestation, but that at the time herein pertinent in the Staten Island
warehouse two lots of powder from other manufacturers were infested,
although eighty-eight lots and the warehouse itself were not. The Government
moved for summary judgment upon affidavits, opposition affidavits, and an
agreed statement that included the fact that the Contract Disputes Board had
made findings. The district court granted the motion, and in a written opinion
reported at 185 F. Supp. 541 (1960) held that the findings of the Contract
Disputes Board were not based upon fraud, bad faith, caprice, or insubstantial
evidence, and that Hamden sold the powder upon the implied warranties of
description, merchantability, and fitness for a specific purpose.

Hamden appealed. It claimed that the district court erred in not holding that the
Government was barred from a recovery because of its delayed notice of
rejection; in refusing to consider Hamden's newly discovered evidence; in
holding that the Contract Disputes Board's ultimate findings were supported by
substantial evidence; and in failing to make findings of its own supplanting
those made by the Board.

The provision contained in the contracts between appellant and CCC that the
Government relied upon was a standard one, Article 22 of Form PMA-100. It
read in pertinent part as follows:

10

"Disputes. Any dispute concerning questions of fact which may arise under the
contract * * * shall be decided by the officer executing the contract in behalf of

the Agency * * * [C]ontractor may appeal to the head of Agency, whose

decision or that of his designated representative shall be final and conclusive
upon the parties. Pending decision of such dispute the Contractor shall
diligently proceed with the performance of the Contract."
11

No determinations could be more factual than those of ascertaining the times

when the appellant's milk powder became infested and when that infestation
was discoverable.

12

Inasmuch as the appellant has appeared, briefed, and argued its case before the
Contract Disputes Board without reservation and in compliance with Article 22,
it is now too late for it to assert that the Board could not decide the factual
issues presented in appellant's dispute with the Government. This disputes
clause provided a method of arbitration by which factual disputes arising
between the contracting parties were to be resolved. E. I. DuPont De Nemours
& Co. v. Lyles & Lang Constr. Co., 219 F.2d 328, 334 (4 Cir. 1955), cert.
denied 349 U.S. 956, 75 S.Ct. 882, 99 L.Ed. 1280. In none of the cases relied
upon by the appellant, E. I. DuPont De Nemours & Co. v. Lyles & Lang
Constr. Co., supra; United States v. Duggan, 210 F.2d 926 (8 Cir. 1954);
Jacobs v. United States, 239 F.2d 459 (4 Cir. 1956), cert. denied 353 U.S. 904,
77 S.Ct. 666, 1 L.Ed.2d 666 (1957); and 42nd St. Fotoshop, Inc. v. United
States, 137 F.Supp. 313 (S.D. N.Y.1955), had either party submitted the dispute
there involved to the agency board. We add that disputes concerning the times
of infestation and its discoverability seem to us to be especially appropriate for
administrative adjudication under Article 22.

13

Review by the courts is limited to determining whether the decision of the

Board is supported by substantial evidence and whether it is free from fraud,
caprice, arbitrary conduct, and bad faith. 68 Stat. 81 (1954), 41 U.S. C.A. 321.
"Substantial evidence * * means such relevant evidence as a reasonable mind
might accept as adequate to support a conclusion." Consolidated Edison v. N.
L. R. B., 305 U.S. 197, 229, 59 S.Ct. 206, 207, 83 L.Ed. 126 (1938).
Substantial evidence supports the decision of the Contract Disputes Board that
the appellant's powder was infested at the time of delivery but that the
infestation was not discoverable until later. The appellant's plant was infested in
July. A shipment of powder just prior to that date was also infested; and, when
it was discovered to be so, Hamden, without admitting any responsibility for
the infestation, accepted its return. In September larvae were discovered in the
powder involved in this litigation. An entomologist from the Department of
Agriculture expressed an opinion that the powder was infested at the time of
delivery, but that the infestation was not then discoverable. Moreover, the
returned July shipment was found to be infested after that shipment had

similarly passed initial inspection.

14

The appellant asserts that the decision of the Contract Disputes Board should
be overturned because the Government admitted several years later that in one
of the two warehouses where the appellant's powder was stored two lots of
powder out of ninety such lots received from other manufacturers were found to
be infested. If appellant's newly discovered evidence had been more significant,
we would have been required to deal with the interesting and difficult question
whether the district court should have considered this evidence. Compare P. L.
S. Coat & Suit Corp. v. United States, 180 F.Supp. 400 (Ct.Cl.1960), and
Volentine and Littleton v. United States, 145 F.Supp. 952 (Ct.Cl.1956), with
United States Nat'l Bank of Portland v. United States, 178 F.Supp. 910
(D.C.D.Ore. 1959), and Mann Chem. Labs. Inc. v. United States, 174 F.Supp.
563 (D.C.D. Mass.1958). But Hamden's additional evidence that it would have
had the district judge consider is too insignificant to shake the determination
that the Board's findings were supported by substantial evidence and were free
from fraud or other infirmities.

15

Inasmuch as its milk powder was not fit for human consumption, the appellant
breached its implied warranties of description, fitness for a special purpose, and
merchantability. N. Y. Personal Property Law, McKinney's Consol. Laws, c.
41, 95, 96(1), (2), Uniform Sales Act, 14, 15(1) (2). 1 It knew from the
grading requirements of the CCC that "Extra Grade" powder had to be suitable
for human consumption. Inasmuch as forms of infestation, including those
involved here, can be latent at the time of a delivery, a buyer is forced to rely
upon a seller's care in keeping its plant sanitary; and the Government's failure
here to discover the infestation upon inspection did not relieve the appellant of
its liability under its warranties. See N. Y. Personal Property Law, 96 (3),
Uniform Sales Act, 15(3); J. Aron & Co. v. Sills, 240 N.Y. 588, 148 N.E. 717
(1925); Rinaldi v. Mohican Co., 225 N.Y. 70, 121 N.E. 471 (1918); Liberman
v. Sheffield Farms-Slawson-Decker Co., 117 Misc. 531, 191 N.Y.S. 593
(1921).

16

New York Personal Property Law, 130 (Uniform Sales Act section 49)
provides:

17

"[I]f, after acceptance of the goods, the buyer fails to give notice to the seller of
the breach of any promise or warranty within a reasonable time after the buyer
knows, or ought to know, of such breach, the seller shall not be liable therefor."

18

Neither party knew of any infestation until July. In that month the appellant

learned from state and federal officials that its plant had been infested, and a
recent shipment of milk powder from the plant had likewise been found to be
infested. In September, maggots were discovered in the powder involved in this
litigation. Formal notice of the breach was given to the appellant in October.
Ordinarily whether notice is given within a reasonable time is a question for the
trier of fact. Lembo v. Andola, 277 App.Div. 1077, 100 N.Y.S. 2d 561 (1950);
Schrager & Muster, Inc. v. Magical Frocks, Inc., Sup., 77 N.Y.S. 2d 825
(App.T.1948); 9 Wigmore, Evidence, 2553 (3d ed. 1940).
19

That the written notice from the Contracting Officer to Hamden was timely and
adequate under all of the circumstances of this case was a factual matter for the
Contract Disputes Board to decide on the evidence before it. The court below,
in view of the extraordinary powers given to the Contract Disputes Board under
Title 41 U.S.C.A. 321, short of the evidence being so insubstantial as to make
it a question of law, could not try that issue anew, nor can this court on the
record disturb that conclusion.

20

The judgment below is affirmed.

Notes:
1

Whether the New York law of sales applies to these contracts of its own force
or as incorporated by federal law was not raised by the parties and need not be
decided. Compare De Sylva v. Ballentine, 351 U.S. 570, 76 S.Ct. 974, 100
L.Ed. 1415 (1956); Clearfield Trust Co. v. United States, 318 U.S. 363, 63
S.Ct. 573, 87 L.Ed. 838 (1943); Royal Indemnity Co. v. United States, 313 U.S.
289, 61 S.Ct. 995, 85 L.Ed. 1361 (1941)